It is now a well-known fact that super funds can, in strictly limited circumstances, borrow to invest in real property under an exemption in the Superannuation Industry (Supervision) Act 1993 (“SISA”).

These types of transactions are known as a Limited Recourse Borrowing Arrangements (“LRBA”). There a number of technical elements that need to be satisfied in order to meet the exemption and the consequences of getting them wrong can be costly and difficult to unwind. The Australian Taxation Office has issued numerous regulatory updates and alerts and will continue to fine tune the way LRBAs are regulated, much to the chagrin of the SMSF industry.

Our involvement in this area sees 2 recent updates which are discussed below.

First, the ATO has released Taxpayer Alert 2012/ 7. TA 2012/7 highlights the need for advisors and SMSF trustees to remain vigilant in this highly regulated and technical area.

The SMSF industry was alarmed about one particular concern raised by the ATO in the Alert. That is where the trustee of the holding trust is not in existence and the holding trust is not established at the time the contract to acquire the asset is signed. In Victoria, given the flexible stamp duty arrangements available around nominations, the contract is very often signed by the super fund before setting up the holding trustee company or the holding trust. So the concern raised by the ATO is something many advisors will want to see further discussion or guidance be provided.

Although further clarification is being sought from the ATO on this point, we believe that this concern would not affect the transactions we have undertaken for our clients. If you are concerned about a transaction which has or had this issue, you are welcome to contact us.

The other concerns raised by the ATO in the Alert were:

  1. Arrangements involving property investments using LRBA, where the elements of the transaction do not meet the requirements under the SISA, ie where:
    • there is a breach of the sole purpose test set out in s.62;
    • there is a failure to meet all of the LRBA exemption requirements set out in s.67A;
    • the acquired asset did not comply with the definition of a single acquirable asset as provided under s.67A(2);
    • the acquired asset is subject to a charge which would prohibit the fund from borrowing money or maintaining a borrowing of money under s. 67A(1)(f); and
    • the deposit paid by the SMSF and/or loan repayment by the SMSF may be considered as a payment of superannuation benefits which contravenes Part 6 of the SISR where the title of the property is not held by the trustee of the holding trust.
  2. Arrangements involving property investments using related unit trusts, where an underlying unit trust structure is not meeting the requirements set out in Div 13.3A of the SIS Regulations, the sole purpose test, and/or the in-house asset rules.


Second, we understand that there are very few banks in the market that are prepared to refinance an existing Limited Recourse Borrowing Arrangement (“LRBA”) from another bank or under a related party loan even if they do, the procedures that are involved in doing so are far from being straightforward.

We were recently instructed to provide advice for a client who wished to refinance not one, but two LRBA facilities. The first LRBA facility was with a financial institution and the other LRBA facility was a related party loan. The bank’s concern was whether or not the transactions were compliant with the SISA, as the SMSF cannot maintain or refinance a borrowing that was non-compliant to begin with under s.67A. Although strictly speaking, this is not a bank’s problem, SMSF trustees should be aware of this when entering into a new LRBA facility as it limits the ability to refinance in the future.

This situation highlights the fact that LRBA are complicated transactions, and that the practical implications and ramifications of LRBA transactions are still very much evolving.

If you have any queries about this article or you are interested in any aspect of Limited Recourse Borrowing Arrangements for Self-Managed Super Funds, please do not hesitate to contact Derrick Toh.


The content and information contained in this article is intended only to provide a summary and general overview of the topic. It is not intended to be comprehensive nor does it constitute legal advice. The information in this article may have changed, although we will make every effort to ensure its accuracy and currency at the time it was published. You should seek legal or other professional advice before acting or relying on any information in this article.

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